ValueVision Inc (VVTV) Q3 Updated Business Valuation

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This post is an update to ValueVision Inc (VVTV) according to the latest 10-Q filing on Dec 11,2008.

Click here to read the first post on VVTV to get the background information and valuation numbers as I will be skipping some sections that I feel have not changed.

Business Developments

As hoped, VVTV is now planning to sell itself as one of its strategic options. Considering the business, competition, environment and management including the board, this is a good move. There hasn’t been any further news relating to this sale, but it seems like there are interested buyers out there.

Growth Strategy

As I stated in the previous post, my reason for looking into ValueVision is based on the assumption that the company is sold off or liquidated. I am therefore assuming the entire retail business will provide 0% growth for the business, however, I am not implying they won’t be making any money off retail. The cash from retail should just cover their high fixed operating costs.

The growth strategy and my thoughts remain the same as the previous post.

Risks

Although the current price has probably factored in most of the information, a downside risk still remains. The risk related to uncertainty aspects include:

Renegotiation of cable contracts which is due to expire on Dec 31, 2008

Financial Statement Updated Numbers

The 3rd quarter numbers are compared to the previous quarter rather than a year ago as a one year comparison does not provide a good indication of the business at the moment.

My perspective is that the balance sheet is clean, but the future is bleak and uncertain.

Numbers compared to the previous quarter:

Balance Sheet

Cash & Equivalents up 15.6%

Short term investments down 54.3%

Accounts receivables down 22.5%

Inventories up 26.7%

Accounts payable up 59.8%

Total current liabilities up 29.7%

increase due to accounts payable

Income Statement

Net sales down 12%

Cost of Sales down 13%

Sales and COGS are both down the same amount which is a good thing from an accounting point of view. If sales goes down but COGS goes up or COGS is up more than sales, it is a big warning sign for fishy accounting.

CEO transition cost of $1.8 million. Statements mention it is a one off charge, but it seems like this line is often added as CEO turnover rate is very high. If management stabilizes, about $0.06 per share should be added back to net income.

Other expenses came up as $969,000, which is due to selling securities at a loss. No cash taken out of the bank to pay for this expense.

Statement of Cash Flows

Collection of accounts receivables up 23%

Cash used for inventory up 62% but still positive

Cash from operations up 66%

Cash increase of 16%

Valuation

With the numbers from the 3rd quarter statement, valuation numbers have been updated from the previous post.

A quick way to look at VVTV is by their net sales per FTE. VVTV reaches 72 million households with the average net sales being $6.92 per household, , down from $7.92 in the previous quarter. But we took this into consideration last time by assuming a drastic consumer contraction and took a low, yet possible number of $4 net sales per household. This still yeilds a value of $288 million (4×72=288) to the network, which is now 21 times more than its current $13.46 million market cap.

ValueVision is currently being sold for 43% of its NNWC value compared to 32% for last quarter. The NNWC per share value is now $0.92 compared to the stock price of $0.40.

However, the NNWC does not include ValueVision’s main assets which is its FCC license, NBC license and its owned property.

Let’s assume the property of ValueVision was affected by the housing crisis by 20%, with the reason given in the first post. The office real estate in Minnesota is then given a value of $20 million. Add in the FCC, NBC license and property to NNWC to get a value of $2.71 per share. The current price is still 15% to its NNWC and asset value.

However, one thing we should consider is that this price only applies if the company is sold this instant. Cash, inventory, receivables and liabilities are variable which can either increase the NNWC or reduce it.

Therefore, if we look at a value that is independent of these liquid assets by only considering its licenses and buildings, a hard conservative value is $60.13 million which is still 4.4x more than its current market price.

Conclusion

The NNWC value has decreased, but the underlying assets still remain the same. There are no alarming indicators in the statements and the 66% margin of safety I applied before purchasing has cushioned the recent price decline but still allows for a very good potential reward.

However, before making a purchase, consider the additional risks outlined above.

HSNI is a huge gamble. Their EPV value is much less than their BVPS on Equity. That is a sign that they’ve either lost their competitive advantage or that they are poorly managed. Could be a combination of both. Q2 was atrocious and will have a lasting impact on the business for awhile. It’ll take at least a full year to make up for that one quarter loss in net income. I don’t think they are in jeopardy of bankruptcy but they definitely are flying by the seat of their pants. I wouldn’t suggest you invest in them especially given the fact that their are so many great opportunities currently who’s financials are so much stronger.

Yes there is a risk associated with HSNI and other network companies, including VVTV, but I think it looks worse because of the spin-off. Not saying that I will make it 20% of my portfolio even at a cheap price so all about asset management.

I haven’t dissected HSNI but just took a quick glance at the numbers and it certainly isn’t a business I’d entertain any further valuation on. I sent you an email today, check it out. Have a great weekend.

If your looking for longs in cheap stocks like VVTV I recommend the ones that are in play. Check out CHRS, TUES on pull-backs,maybe SRZ stock like VVTV aren’t going up anyway unless institutions start to buy them no matter how cheap it is

Over 1 year ago I first noticed TUES but I never bothered looking deeper into TUES because I didn’t like the business. I’ve shopped there and I know a friend who has a friend working at TUES and the stories dont impress me.

But now that I’ve been looking into more net nets, I realise I should be looking at TUES from a different angle rather than a simple long.

Regarding VVTV, we’ll see whether the board decides to announce a sale on Feb 2, 2009. But there has to be some serious buying before it goes up but then again, we have time to help us out.

Jae, I’m reading the fiscal 2007 10K right now. It seems to me that these agreements are mainly with NBC and that they can be transferred to a new owner of the business. I’ve also read many transponder agreements between cable companies and businesses who have included the option that would let a company dissolve an agreement if they were to go into liquidation. Although there is a higher probability now of speculation because the complete details of these transponder agreements haven’t been released from the company I think their are many relevant questions one has to ask in this situation to feel comfortable with the investment. Unfortunately, many of those questions are speculative.

1) Why hasn’t the details of the agreements been released? A: I believe if everyone knew how good of an opportunity this were, shareholder interest would dilute the final outcome.

2) According to many Satellite transponder agreements I’ve looked up as far back as 1997, a clause in each of them has allowed the company to dissolve the agreement if they were to go into liquidation or bankruptcy.

3) The agreement that is in effect with NBC concerning Trademarks is transferable and can be sold by VVTV (according to the fiscal 2007 10K).

Note that the termination of lease option appears to be for the benefit of the non-liquidating/non-bankrupt party. I.E., if a company goes bankrupt and cannot pay its commitments, the party who is owed can terminate the agreement rather than let it be transferred or retained as a right by the bankruptcy estate. If it were not terminated, it would be an executory contract in bankruptcy that could be accepted or rejected by the estate, and if rejected there would be a senior unsecured liability for some portion of the value (maybe a third? I’m out of date on bankruptcy law) that would come before the preferred.

Note also that book value of an FCC license or a TV station may have little to do with realizable value in this economy. Ad-based media are being pummeled by declining results and multiples on these companies are way down because investors fear a secular change (to the Net) rather than a cyclical decline. If you want to dig down for value, spend some time on how that TV station/license value was booked and whether reality is more or less than that number (if the BV is old the real value might be higher).

Building value in Minnesota is also likely less than would be hoped, these days.

As for net working capital, it all revolves around the cash burn rate, and 3Q numbers look like the start of a trend. They will have to be very sharp working capital managers to avoid a cash crunch in this environment.

The company needs to get a major liquidity cushion to be assured of avoiding bankruptcy given its current numbers. No buyer looking at what is happening operationally would want to provide that cushion, IMO. The value here, if it exists, is solely from the expiration of carriage contracts and the potential for the station/license/studios to be worth something to someone who thinks it can be done better. Note that when the carriage contracts end and if they are negotiated to much lower costs, the dial position is likely to move from low (it’s channel 8 on my system) to high (JTV is 183 on my system; QVC might be in the 60s). Higher dial position means fewer chance eyeballs and probably lower sales, so don’t extrapolate profitability to the carriage contract in a linear fashion.

To me, this is all about the deal – an investment banking end-game. If the hard assets have enough value in liquidation to give upside to the common then they have enough value out of liquidation and a sale will occur. If it comes down to working capital liquidation, I would bet the preferred holder would work to pay that off and not care so much about the common. All speculation, of course. So, focus on the major assets.

I’ll be sticking with VVTV and see what they say in Feb 09 regarding their strategic decision.The notes regarding the obligation isn’t what I was expecting BUT it is important to note that this is not the first time either. This is part of the business and the industry it is in.

Hope Cannell pushes harder to liquidate or sell itself. Cannell still holds a position so we have one activist doing the work for us.

I’m running into more and more transponder agreements online. Although they don’t lend any certainties regarding VVTV’s obligations which are transponder agreements, they do fuel my optimism that although being off balance obligations they may not be a liability that will affect shareholder value if a liquidation occurs. I’ll post more of these agreements if you like but here is one that I discovered this evening.

Here is one I just found that I believe is very relevant to VVTV’s situation because its recent (2006 – 2007) and it is a transponder agreement from a competitor of theirs; JTV which can be found on channel 313 on Direct TV & Channels 86 & 227 on Dish Network.

“Termination Options: Either party may terminate this agreement upon 30 days written notice to the other party.”

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